Document
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
(Mark One)
 
 
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended June 30, 2017
OR
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from                      to                     
Commission file number: 1-12162
BORGWARNER INC.
________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
 
13-3404508
State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization
 
Identification No.)
 
 
 
3850 Hamlin Road, Auburn Hills, Michigan
 
48326
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (248) 754-9200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ  NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ  NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o  NO þ
As of July 21, 2017, the registrant had 211,062,474 shares of voting common stock outstanding.


Table of Contents

BORGWARNER INC.
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2017
INDEX
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions)
June 30,
2017
 
December 31,
2016
ASSETS

 

Cash
$
387.1

 
$
443.7

Receivables, net
1,939.3

 
1,689.3

Inventories, net
701.4

 
641.2

Prepayments and other current assets
165.4

 
137.4

Total current assets
3,193.2

 
2,911.6




 


Property, plant and equipment, net
2,663.8

 
2,501.8

Investments and other long-term receivables
528.6

 
502.2

Goodwill
1,734.7

 
1,702.2

Other intangible assets, net
453.8

 
463.5

Other non-current assets
714.4

 
753.4

Total assets
$
9,288.5

 
$
8,834.7




 


LIABILITIES AND EQUITY


 


Notes payable and other short-term debt
$
141.8

 
$
175.9

Accounts payable and accrued expenses
1,904.7

 
1,847.3

Income taxes payable
59.6

 
68.6

Total current liabilities
2,106.1

 
2,091.8




 


Long-term debt
2,077.9

 
2,043.6

 
 
 
 
Other non-current liabilities:
 
 
 
Asbestos-related liabilities
800.6

 
827.6

Retirement-related liabilities
290.8

 
294.1

Other
321.2

 
275.7

Total other non-current liabilities
1,412.6

 
1,397.4

 
 
 
 
Commitments and contingencies


 
 



 


Common stock
2.5

 
2.5

Capital in excess of par value
1,088.7

 
1,104.3

Retained earnings
4,557.3

 
4,215.2

Accumulated other comprehensive loss
(606.4
)
 
(722.1
)
Common stock held in treasury
(1,430.1
)
 
(1,381.6
)
Total BorgWarner Inc. stockholders’ equity
3,612.0

 
3,218.3

Noncontrolling interest
79.9

 
83.6

Total equity
3,691.9

 
3,301.9

Total liabilities and equity
$
9,288.5

 
$
8,834.7


See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except share and per share amounts)
2017
 
2016
 
2017
 
2016
Net sales
$
2,389.7

 
$
2,329.2

 
$
4,796.7

 
$
4,597.8

Cost of sales
1,875.5

 
1,832.5

 
3,765.2

 
3,636.8

Gross profit
514.2

 
496.7

 
1,031.5

 
961.0


 
 
 
 
 
 


Selling, general and administrative expenses
215.0

 
202.3

 
433.8

 
390.7

Other (income) expense, net
(0.3
)
 
25.0

 
5.5

 
36.7

Operating income
299.5

 
269.4

 
592.2

 
533.6


 
 
 
 
 
 


Equity in affiliates’ earnings, net of tax
(14.4
)
 
(10.1
)
 
(24.1
)
 
(19.2
)
Interest income
(1.4
)
 
(1.5
)
 
(2.9
)
 
(3.1
)
Interest expense and finance charges
18.0

 
21.4

 
36.0

 
42.7

Earnings before income taxes and noncontrolling interest
297.3

 
259.6

 
583.2

 
513.2


 
 
 
 
 
 


Provision for income taxes
76.2

 
84.2

 
162.5

 
164.6

Net earnings
221.1

 
175.4

 
420.7

 
348.6

Net earnings attributable to the noncontrolling interest, net of tax
9.1

 
11.0

 
19.5

 
20.1

Net earnings attributable to BorgWarner Inc. 
$
212.0

 
$
164.4

 
$
401.2

 
$
328.5

 
 
 
 
 
 
 
 
Earnings per share — basic
$
1.01

 
$
0.76

 
$
1.90

 
$
1.52

 
 
 
 
 
 
 
 
Earnings per share — diluted
$
1.00


$
0.76


$
1.89

 
$
1.51

 
 
 
 
 
 
 
 
Weighted average shares outstanding (thousands):
 
 
 
 
 
 
 
Basic
210,572

 
215,735

 
211,084

 
216,562

Diluted
211,478


216,663


211,857

 
217,401

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.14

 
$
0.13

 
$
0.28

 
$
0.26


See accompanying Notes to Condensed Consolidated Financial Statements.

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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Net earnings attributable to BorgWarner Inc. 
$
212.0

 
$
164.4

 
$
401.2

 
$
328.5

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
73.4

 
(54.5
)
 
122.4

 
13.9

Hedge instruments*
(2.3
)
 
1.7

 
(3.5
)
 
3.4

Defined benefit postretirement plans*
(4.5
)
 
0.6

 
(4.4
)
 
0.4

Other*
1.2

 
(0.8
)
 
1.2

 
(1.3
)
Total other comprehensive income (loss) attributable to BorgWarner Inc.
67.8

 
(53.0
)
 
115.7

 
16.4

 
 
 
 
 
 
 
 
Comprehensive income attributable to BorgWarner Inc.
279.8

 
111.4

 
516.9

 
344.9

Comprehensive (loss) income attributable to the noncontrolling interest
(0.6
)
 
(1.5
)
 
3.4

 
0.1

Comprehensive income
$
279.2

 
$
109.9

 
$
520.3

 
$
345.0

____________________________________
*
Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.


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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
OPERATING
 
 
 
Net earnings
$
420.7

 
$
348.6

Adjustments to reconcile net earnings to net cash flows from operations:
 
 
 
Depreciation and amortization
197.1

 
193.4

Restructuring expense, net of cash paid

 
9.8

Stock-based compensation expense
24.3

 
20.3

Deferred income tax provision
38.8

 
23.5

Equity in affiliates’ earnings, net of dividends received, and other
(10.4
)
 
(24.3
)
Net earnings adjusted for non-cash charges to operations
670.5

 
571.3

Changes in assets and liabilities:


 
 

Receivables
(174.0
)
 
(123.1
)
Inventories
(31.2
)
 
(14.1
)
Prepayments and other current assets
(13.4
)
 
(0.9
)
Accounts payable and accrued expenses
(0.7
)
 
(54.3
)
Income taxes payable
(20.2
)
 
(1.7
)
Other assets and liabilities
(31.8
)
 
(15.0
)
Net cash provided by operating activities
399.2

 
362.2




 


INVESTING


 
 

Capital expenditures, including tooling outlays
(254.2
)
 
(234.7
)
Proceeds from asset disposals and other
1.0

 
5.8

Payments for venture capital investment
(2.0
)
 

Net cash used in investing activities
(255.2
)
 
(228.9
)



 


FINANCING


 
 

Net (decrease) increase in notes payable
(32.0
)
 
65.2

Repayments of long-term debt, including current portion
(12.5
)
 
(9.3
)
Payments for debt issuance cost
(2.4
)
 

Payments for purchase of treasury stock
(84.7
)
 
(183.8
)
Payments for stock-based compensation items
(1.9
)
 
(3.3
)
Dividends paid to BorgWarner stockholders
(59.1
)
 
(56.2
)
Dividends paid to noncontrolling stockholders
(21.7
)
 
(23.5
)
Net cash used in financing activities
(214.3
)
 
(210.9
)
Effect of exchange rate changes on cash
13.7

 
(5.1
)
Net decrease in cash
(56.6
)
 
(82.7
)
Cash at beginning of year
443.7

 
577.7

Cash at end of period
$
387.1

 
$
495.0


 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 

Cash paid during the period for:
 
 
 

Interest
$
40.3

 
$
44.8

Income taxes, net of refunds
$
152.0

 
$
143.7


See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)      Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The balance sheet as of December 31, 2016 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as, the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates. Certain prior period amounts have been reclassified to conform to current period presentation.

(2) Research and Development Expenditures

The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract and accepted by the customer. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation as stated in the respective customer agreement.

The following table presents the Company’s gross and net expenditures on R&D activities:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Gross R&D expenditures
$
119.7

 
$
104.4

 
$
231.7

 
$
205.0

Customer reimbursements
(14.8
)
 
(19.4
)
 
(30.4
)
 
(34.7
)
Net R&D expenditures
$
104.9

 
$
85.0

 
$
201.3

 
$
170.3


The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded 5% of annual net R&D expenditures in any of the periods presented.


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(3) Other Expense, net

Items included in other expense, net consist of:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Lease termination settlement
$

 
$

 
$
5.3

 
$

Merger and acquisition expense

 
7.2

 

 
13.0

Restructuring expense

 
19.2

 

 
25.6

Other (income) expense
(0.3
)
 
(1.4
)
 
0.2

 
(1.9
)
Other expense, net
$
(0.3
)
 
$
25.0

 
$
5.5

 
$
36.7


During the first three months of 2017, the Company recorded a loss of $5.3 million related to the termination of a long term property lease for a manufacturing facility located in Europe.

During the three and six months ended June 30, 2016, the Company incurred transition and realignment expenses and other professional fees of $7.2 million and $13.0 million, respectively, associated with the November 2015 acquisition of Remy International, Inc. ("Remy").

During the three and six months ended June 30, 2016, the Company recorded restructuring expense of $19.2 million and $25.6 million, respectively. This expense related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. See the Restructuring footnote to the Condensed Consolidated Financial Statements for further discussion of these expenses.

(4) Income Taxes

The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

At June 30, 2017, the Company's effective tax rate for the first six months was 27.9%. This rate includes tax benefits of $6.6 million related to one-time tax adjustments, primarily resulting from tax audit settlements.

At June 30, 2016, the Company's effective tax rate for the first six months was 32.1%. This rate includes tax benefits of $5.4 million related to restructuring expense as discussed in the Other Expense, net footnote to the Condensed Consolidated Financial Statements, and $1.3 million related to other one-time tax adjustments, as well as a tax expense of $2.6 million related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.

The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.


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Table of Contents

(5) Inventories, net

Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories consisted of the following:
 
June 30,
 
December 31,
(in millions)
2017
 
2016
Raw material and supplies
$
424.8

 
$
378.6

Work in progress
120.1

 
102.9

Finished goods
171.0

 
174.9

FIFO inventories
715.9

 
656.4

LIFO reserve
(14.5
)
 
(15.2
)
Inventories, net
$
701.4

 
$
641.2


(6) Property, Plant and Equipment, net
 
June 30,
 
December 31,
(in millions)
2017
 
2016
Land, land use rights and buildings
$
838.4

 
$
781.6

Machinery and equipment
2,562.8

 
2,371.2

Capital leases
3.4

 
3.9

Construction in progress
378.5

 
338.2

Total property, plant and equipment, gross
3,783.1

 
3,494.9

Less: accumulated depreciation
(1,293.1
)
 
(1,137.5
)
Property, plant and equipment, net, excluding tooling
2,490.0

 
2,357.4

Tooling, net of amortization
173.8

 
144.4

Property, plant and equipment, net
$
2,663.8

 
$
2,501.8


As of June 30, 2017 and December 31, 2016, accounts payable of $56.1 million and $85.3 million, respectively, were related to property, plant and equipment purchases.

Interest costs capitalized for the six months ended June 30, 2017 and 2016 were $9.2 million and $7.1 million, respectively.

(7) Product Warranty

The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual.


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Table of Contents

The following table summarizes the activity in the product warranty accrual accounts:
(in millions)
2017
 
2016
Beginning balance, January 1
$
95.3

 
$
107.9

Provisions
43.9

 
34.7

Acquisitions

 
3.9

Payments
(32.2
)
 
(30.8
)
Translation adjustment
3.9

 
1.2

Ending balance, June 30
$
110.9

 
$
116.9


Acquisition activity in 2016 of $3.9 million was related to the Company's accrual for product issues that predated the Company's 2015 acquisition of Remy.

The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
 
June 30,
 
December 31,
(in millions)
2017
 
2016
Accounts payable and accrued expenses
$
67.1

 
$
63.9

Other non-current liabilities
43.8

 
31.4

Total product warranty liability
$
110.9

 
$
95.3


(8) Notes Payable and Long-Term Debt

As of June 30, 2017 and December 31, 2016, the Company had short-term and long-term debt outstanding as follows:
 
June 30,
 
December 31,
(in millions)
2017
 
2016
Short-term debt


 


Short-term borrowings
$
125.0

 
$
156.5




 


Long-term debt


 


8.00% Senior notes due 10/01/19 ($134 million par value)
138.2

 
139.1

4.625% Senior notes due 09/15/20 ($250 million par value)
251.7

 
251.9

1.80% Senior notes due 11/7/22 (€500 million par value)
566.4

 
520.7

3.375% Senior notes due 03/15/25 ($500 million par value)
495.8

 
495.6

7.125% Senior notes due 02/15/29 ($121 million par value)
118.9

 
118.8

4.375% Senior notes due 03/15/45 ($500 million par value)
493.4

 
493.3

Term loan facilities and other
30.3

 
43.6

Total long-term debt
2,094.7

 
2,063.0

Less: current portion
16.8

 
19.4

Long-term debt, net of current portion
$
2,077.9

 
$
2,043.6


In July 2016, the Company terminated interest rate swaps which had the effect of converting $384 million of fixed rate notes to variable rates. The gain on the termination is being amortized into interest expense over the remaining terms of the notes. The value related to these swap terminations as of June 30, 2017 was $3.4 million and $1.0 million on the 4.625% and 8.00% notes, respectively, as an increase to the notes. The value of these interest rate swaps as of December 31, 2016 was $3.9 million and $1.3 million on the 4.625% and 8.00% notes, respectively, as an increase to the notes.


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Table of Contents

The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is being amortized into interest expense over the remaining term of the notes. The value related to these swap terminations at June 30, 2017 and December 31, 2016 was $3.4 million and $4.1 million, respectively, on the 8.00% notes as an increase to the notes.

The weighted average interest rate on short-term borrowings outstanding as of June 30, 2017 and December 31, 2016 was 3.4% and 2.3%, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of June 30, 2017 and December 31, 2016 was 3.9% and 3.8%, respectively.

On June 29, 2017, the Company amended and extended its $1 billion multi-currency revolving credit facility (which included a feature that allowed the Company's borrowings to be increased to $1.25 billion) to a $1.2 billion multi-currency revolving credit facility (which includes a feature that allows the Company's borrowings to be increased to $1.5 billion). The facility provides for borrowings through June 29, 2022. The Company has one key financial covenant as part of the credit agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in compliance with the financial covenant at June 30, 2017 and expects to remain compliant in future periods. At June 30, 2017 and December 31, 2016, the Company had no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding, which increased from $1.0 billion to $1.2 billion effective July 26, 2017. Under this program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes. At June 30, 2017 and December 31, 2016, the Company had outstanding borrowings of $20.0 million and $50.8 million, respectively, under this program, which is classified in the Condensed Consolidated Balance Sheets in Notes payable and other short-term debt.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $1.2 billion.

As of June 30, 2017 and December 31, 2016, the estimated fair values of the Company’s senior unsecured notes totaled $2,157.3 million and $2,081.4 million, respectively. The estimated fair values were $92.9 million and $62.0 million higher than their carrying value at June 30, 2017 and December 31, 2016, respectively. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program approximates fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

The Company had outstanding letters of credit of $23.8 million and $32.3 million at June 30, 2017 and December 31, 2016, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.

(9) Fair Value Measurements

ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:

Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets;

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Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:

A.
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
B.
Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

The following tables classify assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
June 30, 2017
 
Quoted prices in active markets for identical items
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Valuation technique
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
0.1

 
$

 
$
0.1

 
$

 
A
Foreign currency contracts
$
4.6

 
$

 
$
4.6

 
$

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
72.7

 
$

 
$
72.7

 
$

 
C
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
8.6

 
$

 
$
8.6

 
$

 
A
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
December 31, 2016
 
Quoted prices in active markets for identical items
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Valuation
technique
Assets:
 
 
 
 
 
 
 
 
 
Commodity contracts
$
0.1

 
$

 
$
0.1

 
$

 
A
Foreign currency contracts
$
7.2

 
$

 
$
7.2

 
$

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
71.5

 
$

 
$
71.5

 
$

 
C
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
1.1

 
$

 
$
1.1

 
$

 
A

(10) Financial Instruments

The Company’s financial instruments include cash and marketable securities. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivative contracts. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At

12

Table of Contents

June 30, 2017 and December 31, 2016, the Company had no derivative contracts that contained credit risk related contingent features.

The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and supplies purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At June 30, 2017 and December 31, 2016, the following commodity derivative contracts were outstanding:
 
Commodity derivative contracts
Commodity
Volume hedged June 30, 2017
 
Volume hedged December 31, 2016
 
Units of measure
 
Duration
Copper
100.0

 
213.8

 
Metric Tons
 
Dec -17

The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At June 30, 2017 and December 31, 2016, the Company had no outstanding interest rate swaps.

The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows (cash flow hedges), remeasurement exposures that affect earnings (non-designated hedges), and exposures associated with the Company’s net investments in certain foreign operations (net investment hedges). Forecasted cash flows may include capital expenditures, inventory purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. The Company has also designated its Euro-denominated debt as a net investment hedge of the Company's investment in a European subsidiary.

At June 30, 2017 and December 31, 2016, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Functional currency
 
Traded currency
 
Notional in traded currency
June 30, 2017
 
Notional in traded currency
December 31, 2016
 
Duration
Brazilian real
 
Euro
 
1.9

 

 
Jan - 18
Chinese renminbi
 
US dollar
 
14.7

 
33.5

 
Dec - 17
Chinese renminbi
 
Euro
 
43.8

 

 
Jun - 18
Euro
 
Chinese renminbi
 
63.9

 

 
Dec - 17
Euro
 
British pound
 
2.0

 
4.2

 
Dec - 17
Euro
 
Japanese yen
 
1,161.7

 
1,004.8

 
Dec - 17
Euro
 
Polish zloty
 
67.1

 
18.8

 
Dec - 17
Euro
 
Swedish krona
 
267.4

 

 
May - 18
Euro
 
US dollar
 
20.3

 
35.3

 
Dec - 17
Japanese yen
 
Chinese renminbi
 
35.0

 
68.7

 
Dec - 17
Japanese yen
 
Korean won
 
2,850.5

 
5,689.2

 
Dec - 17
Japanese yen
 
US dollar
 
1.0

 
2.0

 
Dec - 17
Korean won
 
Euro
 
6.5

 

 
Dec - 17
Korean won
 
Japanese yen
 
427.9

 
539.9

 
Dec - 17
Korean won

US dollar
 
20.0

 
14.2

 
Dec - 17
Mexican peso
 
US dollar
 
7.9

 
10.5

 
Dec - 17
Swedish krona
 
Euro
 
25.1

 
48.2

 
Dec - 17
US dollar
 
Euro
 
100.0

 

 
Dec - 17


13

Table of Contents

At June 30, 2017 and December 31, 2016, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
 
 
Assets
 
Liabilities
(in millions)
 
Location
 
June 30,
2017
 
December 31, 2016
 
Location
 
June 30,
2017
 
December 31, 2016
Foreign currency
 
Prepayments and other current assets
 
$
4.6

 
$
7.2

 
Accounts payable and accrued expenses
 
$
8.6

 
$
1.1

Commodity
 
Prepayments and other current assets
 
$
0.1

 
$
0.1

 
Accounts payable and accrued expenses
 
$

 
$


Effectiveness for cash flow and net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. To the extent that derivative instruments are deemed to be effective, gains and losses arising from these contracts are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. To the extent that derivative instruments are deemed to be ineffective, gains or losses are recognized into income.

The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at June 30, 2017 market rates.
(in millions)
 
Deferred gain (loss) in AOCI at
 
Gain (loss) expected to be reclassified to income in one year or less
Contract Type
 
June 30, 2017
 
December 31, 2016
 
Foreign currency
 
$
1.4

 
$
5.6

 
$
1.4

Commodity
 
0.1

 
(0.1
)
 
0.1

Net investment hedges
 
(22.2
)
 
29.5

 

Total
 
$
(20.7
)
 
$
35.0

 
$
1.5


Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:

Cash Flow Hedges
 
 
 
 
Gain (loss) reclassified
from AOCI to income
(effective portion)
 
 
 
Gain (loss)
recognized in income
(ineffective portion)
(in millions)
 
 
 
Three Months Ended
 
 
 
Three Months Ended
Contract Type
 
Location
 
June 30,
2017
 
June 30,
2016
 
Location
 
June 30,
2017
 
June 30,
2016
Foreign currency
 
Sales
 
$
0.9

 
$
0.2

 
SG&A expense
 
$
(0.1
)
 
$

Foreign currency
 
Cost of goods sold
 
$
0.5

 
$
0.3

 
SG&A expense
 
$

 
$
(0.1
)
Commodity
 
Cost of goods sold
 
$
0.1

 
$
(1.0
)
 
Cost of goods sold
 
$

 
$


 
 
 
 
Gain (loss) reclassified
from AOCI to income
(effective portion)
 
 
 
Gain (loss)
recognized in income
(ineffective portion)
(in millions)
 
 
 
Six Months Ended
 
 
 
Six Months Ended
Contract Type
 
Location
 
June 30,
2017
 
June 30,
2016
 
Location
 
June 30,
2017
 
June 30,
2016
Foreign currency
 
Sales
 
$
2.0

 
$
0.2

 
SG&A expense
 
$

 
$

Foreign currency
 
Cost of goods sold
 
$
1.3

 
$
(0.2
)
 
SG&A expense
 
$

 
$
0.1

Commodity
 
Cost of goods sold
 
$
0.3

 
$
(1.1
)
 
Cost of goods sold
 
$

 
$



14

Table of Contents

Fair Value Hedges
(in millions)
 
 
 
Three Months Ended
June 30, 2017
 
Three Months Ended
June 30, 2016
Contract Type
 
Location
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
Interest rate swap
 
Interest expense and finance charges
 
$

 
$

 
$
2.6

 
$
(2.6
)

(in millions)
 
 
 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
Contract Type
 
Location
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
Interest rate swap
 
Interest expense and finance charges
 
$

 
$

 
$
11.3

 
$
(11.3
)

Derivatives not designated as hedges are used to hedge remeasurement exposures of monetary assets and liabilities designated in currencies other than the operating units’ functional currency. These derivatives resulted in the following gains and losses recorded in income:

 
 
 
 
Gain (loss) recognized in income
 
Gain (loss) recognized in income
(in millions)
 
 
 
Three Months Ended
 
Six Months Ended
Contract Type
 
Location
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Foreign currency
 
SG&A expense
 
$
1.1

 
$

 
$
0.1

 
$


(11) Retirement Benefit Plans

The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2017 range from $15.0 million to $25.0 million, of which $7.6 million has been contributed through the first six months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.

15



The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:
 
 
Pension benefits
 
Other postretirement
employee benefits
(in millions)
 
2017
 
2016
 
Three Months Ended June 30,
 
US
 
Non-US
 
US
 
Non-US
 
2017
 
2016
Service cost
 
$

 
$
4.5

 
$

 
$
4.2

 
$
0.1

 
$

Interest cost
 
2.2

 
2.6

 
2.4

 
3.3

 
0.8

 
0.9

Expected return on plan assets
 
(3.2
)
 
(5.8
)
 
(3.8
)
 
(6.3
)
 

 

Amortization of unrecognized prior service credit
 
(0.2
)
 

 
(0.2
)
 

 
(1.0
)
 
(1.2
)
Amortization of unrecognized loss
 
1.0

 
1.9

 
1.3

 
1.5

 
0.3

 
0.6

Net periodic benefit (income) cost
 
$
(0.2
)
 
$
3.2

 
$
(0.3
)
 
$
2.7

 
$
0.2

 
$
0.3


 
 
Pension benefits
 
Other postretirement
employee benefits
(in millions)
 
2017
 
2016
 
Six Months Ended June 30,
 
US
 
Non-US
 
US
 
Non-US
 
2017
 
2016
Service cost
 
$

 
$
8.8

 
$

 
$
8.2

 
$
0.1

 
$
0.1

Interest cost
 
4.4

 
5.2

 
4.8

 
6.5

 
1.6

 
1.9

Expected return on plan assets
 
(6.5
)
 
(11.4
)
 
(7.5
)
 
(12.6
)
 

 

Amortization of unrecognized prior service credit
 
(0.4
)
 

 
(0.4
)
 

 
(2.0
)
 
(2.4
)
Amortization of unrecognized loss
 
2.1

 
3.8

 
2.5

 
3.1

 
0.6

 
1.1

Net periodic benefit (income) cost
 
$
(0.4
)
 
$
6.4

 
$
(0.6
)
 
$
5.2

 
$
0.3

 
$
0.7



(12) Stock-Based Compensation

Under the Company's 2004 Stock Incentive Plan ("2004 Plan"), the Company granted options to purchase shares of the Company's common stock at the fair market value on the date of grant. The options vested over periods of up to three years and have a term of 10 years from date of grant. At its November 2007 meeting, the Company's Compensation Committee decided that restricted common stock awards and stock units ("restricted stock") would be awarded in place of stock options for long-term incentive award grants to employees. Restricted stock granted to employees primarily vests 50% after two years and the remainder after three years from the date of grant. Restricted stock granted to non-employee directors generally vests on the first anniversary date of the grant. In February 2014, the Company's Board of Directors replaced the expired 2004 Plan by adopting the BorgWarner Inc. 2014 Stock Incentive Plan ("2014 Plan"). On April 30, 2014, the Company's stockholders approved the 2014 Plan. Under the 2014 Plan, 8 million shares are authorized for grant, of which approximately 4.8 million shares are available for future issuance as of June 30, 2017.

Stock options A summary of the Company’s stock option activity for the six months ended June 30, 2017 is as follows. As of March 31, 2017, there were no outstanding stock options.
 
Shares under option
(thousands)
 
Weighted average exercise price
 
Weighted average remaining contractual life
(in years)
 
Aggregate intrinsic value
(in millions)
Outstanding and exercisable at December 31, 2016
473

 
$
17.47

 
0.1
 
$
10.4

Exercised
(473
)
 
$
17.47

 
 
 

Outstanding and exercisable at June 30, 2017

 


 

 




16

Table of Contents

Restricted stock The value of restricted stock is determined by the market value of the Company’s common stock at the date of grant. In the first six months of 2017, restricted stock in the amount of 776,753 shares and 26,919 shares were granted to employees and non-employee directors, respectively. The value of the awards is recognized as compensation expense ratably over the restriction periods. As of June 30, 2017, there was $41.4 million of unrecognized compensation expense that will be recognized over a weighted average period of 2.1 years.

The Company recorded restricted stock compensation expense of $6.7 million for both three months ended June 30, 2017 and 2016, and $13.5 million and $13.1 million for the six months ended June 30, 2017 and 2016, respectively.

A summary of the Company’s nonvested restricted stock for the six months ended June 30, 2017 is as follows:
 
Shares subject to restriction
(thousands)
 
Weighted average price
Nonvested at December 31, 2016
1,429

 
$
44.12

Granted
777

 
$
40.07

Vested
(453
)
 
$
57.35

Forfeited
(28
)
 
$
41.87

Nonvested at March 31, 2017
1,725

 
$
39.27

Granted
27

 
$
41.13

Vested
(61
)
 
$
51.71

Forfeited
(28
)
 
$
38.06

Nonvested at June 30, 2017
1,663

 
$
38.86


Total Shareholder Return Performance Share Plans The 2004 and 2014 Plans provide for awarding of performance shares to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total shareholder return relative to a peer group of automotive companies. The Company recorded compensation expense of $2.3 million and $2.1 million for the three months ended June 30, 2017 and 2016, respectively, and $5.4 million and $5.1 million for the six months ended June 30, 2017 and 2016, respectively.
 
Relative Revenue Growth Performance Share Plans In the second quarter of 2016, the Company started a new performance share program to reward members of senior management based on the Company's performance in terms of revenue growth relative to the vehicle market over three-year performance periods. The Company recorded compensation expense of $2.2 million and $2.1 million for the three months ended June 30, 2017 and 2016, respectively, and $5.4 million and $2.1 million for the six months ended June 30, 2017 and 2016, respectively.
 

17

Table of Contents

(13) Accumulated Other Comprehensive Loss

The following tables summarize the activity within accumulated other comprehensive loss during the three and six months ended June 30, 2017 and 2016:
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, March 31, 2017
 
$
(481.3
)
 
$
3.8

 
$
(198.0
)
 
$
1.3

 
$
(674.2
)
Comprehensive income (loss) before reclassifications
 
73.4

 
(1.4
)
 
(8.7
)
 
1.2

 
64.5

Income taxes associated with comprehensive income (loss) before reclassifications
 

 
(0.3
)
 
2.7

 

 
2.4

Reclassification from accumulated other comprehensive loss
 

 
(1.5
)
 
2.0

 

 
0.5

Income taxes reclassified into net earnings
 

 
0.9

 
(0.5
)
 

 
0.4

Ending balance, June 30, 2017
 
$
(407.9
)
 
$
1.5

 
$
(202.5
)
 
$
2.5

 
$
(606.4
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, March 31, 2016
 
$
(352.8
)
 
$
(0.3
)
 
$
(190.1
)
 
$
2.4

 
$
(540.8
)
Comprehensive income (loss) before reclassifications
 
(54.5
)
 
0.4

 
0.1

 
(0.8
)
 
(54.8
)
Income taxes associated with comprehensive income (loss) before reclassifications
 

 
0.8

 
(1.1
)
 

 
(0.3
)
Reclassification from accumulated other comprehensive loss
 

 
0.5

 
2.0

 

 
2.5

Income taxes reclassified into net earnings
 

 

 
(0.4
)
 

 
(0.4
)
Ending balance, June 30, 2016
 
$
(407.3
)
 
$
1.4

 
$
(189.5
)
 
$
1.6

 
$
(593.8
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, December 31, 2016
 
$
(530.3
)
 
$
5.0

 
$
(198.1
)
 
$
1.3

 
$
(722.1
)
Comprehensive income (loss) before reclassifications
 
122.4

 
(0.9
)
 
(11.0
)
 
1.2

 
111.7

Income taxes associated with comprehensive income (loss) before reclassifications
 

 
(0.5
)
 
3.7

 

 
3.2

Reclassification from accumulated other comprehensive loss
 

 
(3.6
)
 
4.1

 

 
0.5

Income taxes reclassified into net earnings
 

 
1.5

 
(1.2
)
 

 
0.3

Ending balance, June 30, 2017
 
$
(407.9
)
 
$
1.5

 
$
(202.5
)
 
$
2.5

 
$
(606.4
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, December 31, 2015
 
$
(421.2
)
 
$
(2.0
)
 
$
(189.9
)
 
$
2.9

 
$
(610.2
)
Comprehensive income (loss) before reclassifications
 
13.9

 
1.9

 
(2.0
)
 
(1.3
)
 
12.5

Income taxes associated with comprehensive income (loss) before reclassifications
 

 
0.4

 
(0.2
)
 

 
0.2

Reclassification from accumulated other comprehensive loss
 

 
1.1

 
3.9

 

 
5.0

Income taxes reclassified into net earnings
 

 

 
(1.3
)
 

 
(1.3
)
Ending balance, June 30, 2016
 
$
(407.3
)
 
$
1.4

 
$
(189.5
)
 
$
1.6

 
$
(593.8
)


18

Table of Contents

(14)  Contingencies

In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.

Environmental

The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 27 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.

The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position or cash flows. Generally, this is because either the estimates of the maximum potential liability at a site are not material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.

Based on information available to the Company (which in most cases includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; and remediation alternatives), the Company has an accrual for indicated environmental liabilities of $6.0 million and $6.3 million at June 30, 2017 and at December 31, 2016, respectively. The Company expects to pay out substantially all of the amounts accrued for environmental liability over the next five years.

In connection with the sale of Kuhlman Electric Corporation (“Kuhlman Electric”), a former indirect subsidiary, the Company agreed to indemnify the buyer and Kuhlman Electric against certain environmental liabilities relating to certain operations of Kuhlman Electric that pre-date the Company’s 1999 acquisition of Kuhlman Electric. Kuhlman Electric was sued by plaintiffs alleging personal injuries purportedly arising from contamination at Kuhlman Electric’s Crystal Springs, Mississippi facility. The Company understands that Kuhlman Electric was required by regulatory officials to remediate such contamination.  Kuhlman Electric and its new owner tendered the personal injury lawsuits and regulatory demands to the Company. After the Company made certain payments to the plaintiffs and undertook certain remediation on Kuhlman Electric’s behalf, litigation regarding the validity of the indemnity ensued. The underlying personal injury lawsuits and indemnity litigation now have been fully resolved. The Company continues to pursue litigation against Kuhlman Electric’s historical insurers for reimbursement of amounts it paid on behalf of Kuhlman Electric under the indemnity. The Company may in the future become subject to further legal proceedings relating to these matters.

Asbestos-related Liability

Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions.  We believe that the Company’s involvement is limited because

19

Table of Contents

these claims generally relate to a few types of automotive products that were manufactured over thirty years ago and contained encapsulated asbestos.  The nature of the fibers, the encapsulation of the asbestos, and the manner of the products’ use all lead the Company to believe that these products were and are highly unlikely to cause harm.  Furthermore, the useful life of nearly all of these products expired many years ago. 

The Company’s asbestos-related claims activity during the six months ended June 30, 2017 and 2016 is as follows:
 
 
 
 
 
2017
 
2016
Beginning Claims January 1
9,385

 
10,061

New Claims Received
1,116

 
1,041

Dismissed Claims
(965
)
 
(1,623
)
Settled Claims
(244
)
 
(195
)
Ending Claims June 30
9,292

 
9,284


It is probable that additional asbestos-related claims will be asserted against the Company in the future.  The Company vigorously defends against these claims, and has obtained the dismissal of the majority of the claims asserted against it without any payment.  The Company likewise expects that no payment will be made by the Company or its insurers in the vast majority of current and future asbestos-related claims in which it has been or will be named (or has an obligation to indemnify a party which has been or will be named).

Through June 30, 2017 and December 31, 2016, the Company had accrued and paid $504.2 million and $477.7 million, respectively, in indemnity (including settlement payments) and defense costs in connection with asbestos-related claims. These gross payments are before tax benefits and any insurance receipts. Indemnity and defense costs are incorporated into the Company's operating cash flows and will continue to be in the future.

The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing the value of pending asbestos-related claims and the number and value of those that may be asserted in the future, as well as potential recoveries from the Company’s insurers with respect to such claims and defense costs. During the fourth quarter of 2016, the Company determined that a reasonable estimate of its liability for asbestos claims not yet asserted could be made, and the Company increased its aggregate estimated liability for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted to $879.3 million as of December 31, 2016. The Company's estimate is not discounted to present value and includes an estimate of liability for potential future claims not yet asserted through December 31, 2059 with a runoff through 2067. The Company currently believes that December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally. As of June 30, 2017, the Company’s best estimate of the aggregate liability for both asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs, is as follows:
(in millions)
 
Asbestos Liability as of December 31, 2016
$
879.3

Indemnity and Defense Related Costs
(26.6
)
Asbestos Liability as of June 30, 2017
$
852.7

    
The Company’s estimate of its aggregate liability for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted was developed with the assistance of a third-party consultant. In developing such estimate, the third-party consultant projected a potential number of future

20

Table of Contents

claims based on the Company’s historical claim filings and patterns and compared that to anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against all defendants.  The consultant also utilized assumptions based on the Company’s historical proportion of claims resolved without payment, historical settlement costs for those claims that result in a payment, and historical defense costs.  The liabilities were then estimated by multiplying the pending and projected future claim filings by projected payments rates and average settlement amounts and then adding an estimate for defense costs.

The Company’s estimate of the indemnity and defense costs for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted is its best estimate of such costs. Such estimate is subject to numerous uncertainties.  These include future legislative or judicial changes affecting the U.S. tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments from bankruptcy trusts that presently exist and those that may exist in the future, disease emergence and associated claim filings, the impact of future settlements or significant judgments, changes in the medical condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement or defense strategies. The balances recorded for asbestos-related claims are based on best available information and assumptions that the Company believes are reasonable, including as to the number of future claims that may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such claims, and potential defense costs. Any amounts that are reasonably possible of occurring in excess of amounts recorded are believed to not be significant. The various assumptions utilized in arriving at the Company’s estimate may also change over time, and the Company’s actual liability for asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower than the Company’s estimate as a result of such changes.

The Company has certain insurance coverage applicable to asbestos-related claims.  Prior to June 2004, the settlement and defense costs associated with all asbestos-related claims were paid by the Company's primary layer insurance carriers under a series of interim funding arrangements. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.  A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurers.  The Cook County court has issued a number of interim rulings and discovery is continuing in this proceeding. The Company is vigorously pursuing the litigation against all carriers that are parties to it, as well as pursuing settlement discussions with its carriers where appropriate.  The Company has entered into settlement agreements with certain of its insurance carriers, resolving such insurance carriers’ coverage disputes through the carriers’ agreement to pay specified amounts to the Company, either immediately or over a specified period. Through June 30, 2017 and December 31, 2016, the Company had received $270.0 million in cash and notes from insurers on account of indemnity and defense costs respecting asbestos-related claims.

The Company continues to have additional excess insurance coverage available for potential future asbestos-related claims. The Company also reviews the amount of its unresolved, unexhausted excess insurance coverage for asbestos-related claims, taking into account the remaining limits of such coverage, the number and amount of claims from co-insured parties, the ongoing litigation against the Company’s insurers described above, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent insurers not party to the coverage litigation.    Based on that review, the Company has estimated that as of June 30, 2017 and December 31, 2016 that it has $386.4 million in aggregate insurance coverage available with respect to asbestos-related claims already satisfied by the Company but not yet reimbursed by the insurers, asbestos-related claims asserted but not yet resolved, and asbestos-related claims not yet asserted, in each case together with their associated defense costs. In each case, such amounts are expected to be fully recovered. However, the resolution of the insurance coverage litigation, and the number and amount of claims on our insurance from co-insured parties, may increase or decrease the amount of such insurance coverage available to the Company as compared to the Company’s estimate.


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The amounts recorded in the Condensed Consolidated Balance Sheets respecting asbestos-related claims are as follows:
 
June 30,
 
December 31,
(in millions)
2017
 
2016
Assets:
 
 
 
Non-current assets
$
386.4

 
$
386.4

Total insurance assets
$
386.4

 
$
386.4

Liabilities:
 
 
 
Accounts payable and accrued expenses
$
52.1

 
$
51.7

Other non-current liabilities
800.6

 
827.6

Total accrued liabilities
$
852.7

 
$
879.3


(15) Restructuring

In the fourth quarter of 2013, the Company initiated actions primarily in the Drivetrain segment designed to improve future profitability and competitiveness. As a continuation of these actions, the Company finalized severance agreements with three labor unions at separate facilities in Western Europe for approximately 450 employees. The Company recorded restructuring expense related to these facilities of $5.6 million and $8.2 million for the three and six months ended June 30, 2016, respectively. Included in this restructuring expense are employee termination benefits of $1.8 million and $3.0 million for the three and six months ended June 30, 2016, respectively. Additionally, the Company recorded other restructuring expense $3.8 million and $5.2 million for the three and six months ended June 30, 2016, respectively.

In the second quarter of 2014, the Company initiated actions to improve the future profitability and competitiveness of Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). The Company recorded restructuring expense related to Wahler of $8.0 million and $9.6 million in the three and six months ended June 30, 2016, respectively. Included in this restructuring expense are employee termination benefits of $3.1 million and $4.1 million for the three and six months ended June 30, 2016.

In the fourth quarter of 2015, the Company acquired 100% of the equity interests in Remy. As a result of actions following this transaction, the Company recorded restructuring expense of $3.7 million and $4.8 million in the three and six months ended June 30, 2016, respectively. Included in this restructuring expense is $3.1 million related to winding down certain operations in North America in the three and six months ended June 30, 2016. Additionally, the Company recorded employee termination benefits of $0.6 million and $1.7 million primarily related to contractually required severance associated with Remy executive officers and other employee termination benefits in Mexico. Cash payments for these restructuring activities are expected to be complete by the end of 2017.

Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.

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The following tables display a rollforward of the severance accruals recorded within the Company's Condensed Consolidated Balance Sheet and the related cash flow activity for the three and six months ended June 30, 2017 and 2016:
 
 
Severance Accruals
(in millions)
 
Drivetrain
 
Engine
 
Total
Balance at December 31, 2016
 
$
3.7

 
$
2.7

 
$
6.4

Cash payments
 
(1.6
)
 
(2.1
)
 
(3.7
)
Translation adjustment
 

 
0.1

 
0.1

Balance at March 31, 2017
 
$
2.1

 
$
0.7

 
$
2.8

Cash payments
 
(0.2
)
 
(0.4
)
 
(0.6
)
Translation adjustment
 
0.1

 

 
0.1

Balance at June 30, 2017
 
$
2.0

 
$
0.3

 
$
2.3

 
 
Severance Accruals
(in millions)
 
Drivetrain
 
Engine
 
Total
Balance at December 31, 2015
 
$
25.3

 
$
4.1

 
$
29.4

Provision
 
2.3

 
1.0

 
3.3

Cash payments
 
(17.3
)
 
(2.3
)
 
(19.6
)
Translation adjustment
 
0.7

 
0.2

 
0.9

Balance at March 31, 2016
 
$
11.0

 
$
3.0

 
$
14.0

Provision
 
2.4

 
4.6

 
7.0

Cash payments
 
(5.3
)
 
(2.2
)
 
(7.5
)
Translation adjustment
 
(0.2
)
 
(0.1
)
 
(0.3
)
Balance at June 30, 2016
 
$
7.9

 
$
5.3

 
$
13.2


(16) Earnings Per Share

The Company presents both basic and diluted earnings per share of common stock (“EPS”). Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and common equivalent stock outstanding during the reporting period.

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized. Options are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options.


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The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Basic earnings per share:
 
 
 
 
 
 
 
Net earnings attributable to BorgWarner Inc.
$
212.0

 
$
164.4

 
$
401.2

 
$
328.5

Weighted average shares of common stock outstanding
210.572

 
215.735

 
211.084

 
216.562

Basic earnings per share of common stock
$
1.01

 
$
0.76

 
$
1.90

 
$
1.52

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net earnings attributable to BorgWarner Inc.
$
212.0

 
$
164.4

 
$
401.2

 
$
328.5

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
210.572


215.735


211.084


216.562

Effect of stock-based compensation
0.906

 
0.928

 
0.773

 
0.839

Weighted average shares of common stock outstanding including dilutive shares
211.478


216.663


211.857


217.401

Diluted earnings per share of common stock
$
1.00


$
0.76


$
1.89


$
1.51


(17) Reporting Segments

The Company's business is comprised of two reporting segments: Engine and Drivetrain. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.

The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going operating income or loss.

Adjusted EBIT is the measure of segment income or loss used by the Company. The Company believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Adjusted EBIT for the Company's reporting segments.

Net Sales by Reporting Segment
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Engine
$
1,481.8


$
1,444.2


$
2,977.2


$
2,843.4

Drivetrain
921.0


895.4


1,845.9


1,774.6

Inter-segment eliminations
(13.1
)

(10.4
)

(26.4
)

(20.2
)
Net sales
$
2,389.7


$
2,329.2


$
4,796.7


$
4,597.8



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Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest (“Adjusted EBIT”)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2017
 
2016
 
2017
 
2016
Engine
$
244.3


$
238.1


$
491.3


$
474.8

Drivetrain
109.6


95.3


214.4


181.6

Adjusted EBIT
353.9


333.4


705.7


656.4

Lease termination settlement

 

 
5.3

 

Merger and acquisition expense

 
7.2

 

 
13.0

Restructuring expense


19.2




25.6

Contract expiration gain


(7.5
)



(7.5
)
Corporate, including equity in affiliates' earnings and stock-based compensation
40.0


35.0


84.1


72.5

Interest income
(1.4<